Colorado
Legislative
Council
Staff
M E M O R A N D U M
April 17, 2015
TO: Interested Persons
FROM: Matt Kiszka, Research Analyst, 303-866-6275
SUBJECT: Construction Defect Laws and Issues
Summary
This memorandum provides information on Colorado's construction defect laws
and the various issues surrounding construction defects in Colorado. It summarizes
the current construction defect laws in the state, provides a summary of a recent
Denver Regional Council of Governments study of the Denver housing market, and
gives a comparative view of the civil laws of Arizona, California, Nevada, and Texas
as points of reference.
Colorado Construction Defects Legislative History
In Colorado, the following bills have made significant additions and changes to construction
defect law, dating back to 2001:
House Bill 01-1166 created the Construction Defect Action Reform Act (CDARA).
1
The
act distinguishes construction defect lawsuits related to real property from common lawsuits, such
as negligence. The act requires claimants to create a list of property defects that must be filed with
the court and served on the defendant within 60 days of commencing action. It allows a
homeowners' association (HOA) to file a defect action for five or more units that are part of the
association, and requires it to notify unit occupants of the action.
2
House Bill 03-1161 made amendments and additions to CDARA, and was dubbed
"CDARA II." Many provisions of the bill were introduced in response to numerous class-action
lawsuits that had seen large damages awarded to claimants, which construction industry
professionals argued were above and beyond reasonable amounts. It initiated a "notice of claim"
Room 029 State Capitol, Denver, CO 80203-1784
(303) 866-3521 • FAX: 866-3855 • TDD: 866-3472
www.colorado.gov/lcs
E-mail: [email protected]
1
Section 13-20-801, et seq., C.R.S.
2
Section 38-33.3-303.5, C.R.S.
process, requiring residential owners to notify the construction professional no later than 75 days
before filing an action, provide them with a list of alleged defects, and allow them the opportunity
to inspect the defects and to tender an offer to fix them. Damages were limited to $250,000 in any
action brought against a construction professional. The bill also defined the terms "actual
damages" and "construction professional," and expanded the act's scope to commercial
construction.
House Bill 07-1338 voided the waiver of certain statutory rights and remedies by residential
property owners in their transactions with construction professionals. Specifically, the bill prohibits
clauses in contracts between home buyers and construction professionals from expressly waiving
any of the rights contained in either CDARA or the Colorado Consumer Protection Act. However,
these rights may be waived if a homeowner settles with a construction professional after the claim
for a defect accrues.
House Bill 10-1394 was enacted following a number of contradictory Colorado Court of
Appeals rulings surrounding what constitutes an "occurrence" in a construction defect claim. The
bill states that insurance companies must broadly interpret their duty to defend the insured under
a commercial general liability policy in cases involving construction defect complaints. The act
applies only to insurance policies that were in existence at the time or issued on or after the
effective date of the legislation, and guides the pending and future actions of insurers in interpreting
liability policies issued to construction professionals.
In Hoang v. Monterra Homes (2005), the Colorado Court of Appeals held that faulty
workmanship constitutes an "occurrence," triggering an insurance company's duty to defend the
insured in a construction defect claim.
3
However, in General Security Indemnity Company of
Arizona v. Mountain States Mutual Casualty Company (2009), a different panel of the Court of
Appeals held that faulty workmanship does not constitute an "occurrence," and therefore
construction defect claims against the insured do not need to be defended by an insurance
company under a commercial general policy.
4
For the purposes of guiding pending and future actions in interpreting liability insurance
policies issued to construction professionals, HB 10-1394 clarifies the state's policy as follows:
• in interpreting a liability insurance policy issued to a construction professional, a court
shall presume that the work of a construction professional that results in property
damage is an accident unless the property damage is intended and expected by the
insured;
• upon a finding of ambiguity in an insurance policy, a court may consider a construction
professional's objective, reasonable expectations in the interpretation of an insurance
policy issued to a construction professional;
• if an insurance policy provision that appears to grant or restore coverage conflicts with
an insurance policy provision that appears to exclude or limit coverage, the court shall
construe the insurance policy to favor coverage if reasonably and objectively possible;
3
Hoang v. Monterra Homes LLC, 129 P.3d 1028 (Colo. App. 2005).
4
General Security Company of Arizona v. Mountain States Mutual Casualty Company, 205 P.3d 529 (Colo. App. 2009).
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• if an insurer disclaims or limits coverage under a liability insurance policy issued to a
construction professional, the insurer shall bear the burden of providing a
preponderance of the evidence that the policy bars or limits coverage for legal liability
and any exception to the limitation, exclusion, or condition if the policy does not restore
coverage under the policy; and
• an insurer's duty to defend a construction professional or other insured under a liability
insurance policy shall be triggered by a potentially covered liability.
Since 2010, a variety of bills have been introduced by the General Assembly to amend or
address construction defect laws in Colorado, but have not been adopted. These bills have
attempted to change the law to:
• establish legal procedures and limitations related to construction defect claims to make
construction professionals involved in transit-oriented development (TOD) immune from
claims surrounding noise, odors, light, and other environmental conditions related to
TOD;
• provide insurance premium rebates for developers creating multi-family,
owner-occupied affordable housing;
• require the Division of Housing within the Department of Local Affairs to collect and
study data on the effects of various factors on new owner-occupied affordable housing
in Colorado; and
• require HOAs involved in a construction defect claim to use mediation or third-party
arbitration, and to send advance notice to all unit owners, before a lawsuit can be filed
in disputes involving construction defects.
Denver Metro Area Housing Diversity Study
In October 2013, the Denver Regional Council of Governments (DRCOG) published its
comprehensive Denver Metro Area Housing Diversity Study, which sought to identify factors
influencing attached-housing construction trends in the Denver metro area. The study highlighted
housing diversity within Denver, Denver housing market trends and conditions, and factors
affecting housing construction in Denver.
Housing diversity within Denver. The study noted that, much like the rest of the country,
housing construction in the Denver region nearly came to a halt during the recession of 2009, and
at the time of the study was significantly below pre-recession levels. DRCOG said that while
certain types of housing, such as single family homes and apartment buildings, had seen some
recovery toward pre-recession levels, this was not true across the industry. The study showed that
in 2013 the construction of for-sale housing had experienced the least rebound, and accounted for
only 2 percent of all active construction in downtown Denver.
5
According to DRCOG, out of a total
of 8,545 housing units under construction in downtown Denver at the time of the study, only
193 units were for-sale product. The study also noted that there were no for-sale unit permits
issued for downtown Denver in 2012 and in 2013 by the time of publication.
5
Downtown Denver Partnership, DRCOG.
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More recent data obtained by Legislative Council Staff from the city and county of Denver
suggests that the issuance of new construction permits has been steadily rising since 2011.
Table 1 shows the new construction permit history of the city and county of Denver from 2005
through 2014. Table 2 shows this permit history by the number of units the permits represent.
Table 1
City and County of Denver Residential Construction Permit History
2005 to 2014
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Single-Family
Detached
1,875 1,691 1,191 801 366 535 622 843 825 1,023
Single-Family
Attached*
N/A N/A N/A N/A 117 92 71 200 444 668
Two-Family
Dwelling
186 257 203 169 82 134 148 169 243 277
Apartments and
Condominiums
157 70 81 50 9 13 32 109 96 57
Total 2,218 2,018 1,475 1,020 574 774 873 1,321 1,608 2,025
Percent change
over prior year
N/A -9% -27% -31% -44% 35% 13% 51% 22% 26%
Source: City and County of Denver.
*Single-family attached permit data was combined with single-family detached permit data until 2009. Single-family
attached data contains townhomes of up to three units. Larger townhome developments are included with apartment
and condominium permit data.
Table 2
City and County of Denver Residential Construction Permit History, Total Units
2005 to 2014
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Single-Family
Detached
1,875 1,691 1,191 801 366 535 622 843 825 1,023
Single-Family
Attached*
N/A N/A N/A N/A 117 92 71 202 444 671
Two-Family
Dwelling
186 257 204 169 83 134 148 170 246 284
Apartments and
Condominiums
1,250 1,691 2,407 2,545 336 645 1,912 4,578 4,683 4,127
Total 3,311 3,639 3,802 3,515 902 1,406 2,753 5,793 6,198 6,105
Percent change
over prior year
N/A 10% 4% -8% -74% 56% 96% 110% 7% -2%
Source: City and County of Denver.
*Single-family attached permit data was combined with single-family detached permit data until 2009. Single-family
attached data contains townhomes of up to three units. Larger townhome developments are included with apartment
and condominium permit data.
-4-
The data appears to suggest that the issuance of total new construction permits in Denver
is now approaching pre-recession levels. The total number of units represented by these permits
is in fact outpacing pre-recession levels, and is primarily made up of apartment and condominium
product. It is worth noting that the data for apartments and condominiums does not illustrate the
breakdown between for-sale and rental product, so it is difficult to determine the current mix of this
type of construction.
Additional costs of condominium construction in Denver. In its market study, DRCOG
estimated that because of additional costs related to construction defects, developers need to pay
approximately $15,000 more per unit for a condominium project than an apartment building,
reducing the profitability of such projects and making more affordable condominiums less viable
for developers. DRCOG adds that in industry interviews many national builders said they were no
longer pursuing condominium projects in Colorado because of the increased costs and heightened
risk of litigation.
Conclusions of the DRCOG market study. DRCOG identified lending, foreclosures,
economic and market factors, changing demographics, and construction defects litigation as
factors that have impacted the housing market in the greater Denver area. The report's authors
noted an increase in the availability of construction financing, a reduction in the number of
foreclosures, and an overall improvement in the housing market from positive employment growth
and declining unemployment as factors that have created construction growth within the Denver
area since the recession. Conversely, wage compression and demographic trends have increased
the demand for more affordable housing, while construction of attached multi-family product has
moved towards apartment buildings and high-end condominiums, meaning that this demand is not
being met.
DRCOG's conclusions suggest that the most significant impact on the construction of
for-sale attached products has come from costs related to construction defects litigation. It notes
that most developers believe that the probability of being sued for a construction defect in Colorado
is near 100 percent for projects involving an HOA. DRCOG also states that construction insurance
costs have grown significantly since the passage of HB 10-1394 as multiple carriers have left the
state, although insurance company concerns over their ability to offer policies in the Colorado
contractor liability market appear to stem back further than the enactment of the bill.
Department of Regulatory Agencies Insurance Industry Survey. For a Department of
Regulatory Agencies (DORA) publication from September 2005, the department's Division of
Insurance conducted a series of industry surveys to create a comprehensive list of licensed
insurers who were active in the marketplace and providing general liability policies to construction
professionals. The list is brief, and provides information for only three companies willing to insure
general contractor business; five companies who would cover subcontractor business; and six
companies offering general liability policies to cover artisan and trade contractor businesses. In
the publication, the department speaks of a number of problems faced in compiling the list, such
as companies that would not grant permission to be listed or insurers that were already in the
process of discontinuing general liability policies for construction professionals, but it states that
it did attempt to make the list as comprehensive as possible. Thus, it appears that marketplace
insurance issues were commonplace years before the enactment of HB 10-1394, and commercial
general liability insurance options for construction professionals have been limited for a significant
time period. The division has not updated the publication since 2005.
According to a representative from DORA, several insurance companies discontinued
commercial general liability coverage due to HB 10-1394, although there is no official record of this.
-5-
DORA does not track the actual number of insurance companies that have chosen not to offer
coverage as a result of the bill, and there is no statutory requirement for insurance providers to
report discontinuance of coverage or reasons for discontinuance, making it very difficult to quantify
the effects of the bill. A representative of the Division of Insurance reviewed the history of rate
filings since June 2010 and did not find any filings indicating any insurance company left Colorado
because of the bill.
Comparative View of State-by-State Laws
Table 4 provides a summary of current laws that address residential construction defect
issues in the states of Arizona, California, Colorado, Nevada, and Texas. Information on the laws
of each state is provided, specifically addressing the statute of repose (the law that provides a time
period after which a right to action expires); pre-litigation requirements for claimants wishing to file
an action; the opportunity to remedy that is available to a contractor; any limitation on damages that
may be recovered from a construction defect action; the definition of a "construction defect" within
that state; and any other relevant law or noteworthy information.
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Table 4
Summary of State Laws Addressing Residential Construction Defects
State Statute of Repose
Pre-litigation
Requirements Opportunity to Remedy Limitation on Damages
Definition of
"Construction
Defect"
Additional
Statutory
Provisions Notes/Relevant Info
Arizona
6
Action cannot be brought
more than eight years
after substantial
completion. If a defect is
discovered in the eighth
year, the homeowner can
file an action in the ninth
year.
7
Before filing a dwelling action, the
purchaser must deliver notice to
the seller specifying the basis of
the dwelling action. Seller has the
right to inspect dwelling, and
purchaser must allow inspection
within ten days of seller's request.
A purchaser may not file a
dwelling action until the seller has
completed all intended repairs and
replacements of the alleged
construction defects.
If the seller does not comply with
right to remedy requirements, the
purchaser may commence a
dwelling action.
Purchaser cannot reject seller's
offer to repair or replace the
alleged construction defects, but
may request that the repair or
replacement be performed by a
different construction professional.
Within 60 days of the
purchaser's notice of action, the
seller must provide a response.
The response may include the
seller's notice of intent to repair
or replace any alleged
construction defects, to have the
alleged construction defects
repaired or replaced at the
seller's expense, or to provide
monetary compensation to the
purchaser.
The purchaser may accept or
reject an offer of monetary
compensation or other
consideration, other than repair
or replacement and, if rejected,
may proceed with a dwelling
action on completion of any
repairs or replacements the
seller intends to make or
provide.
The seller must make
reasonable efforts to begin
repairs or replacements within 35
days after the seller's notice of
intent to repair or replace was
sent.
Purchaser cannot recover attorney
and expert fees in a construction
defect dwelling action against a
seller.
A material deficiency in the
design, construction,
manufacture, repair,
alteration, remodeling, or
landscaping of a dwelling
that is the result of one of
the following:
(a) a violation of
construction codes
applicable to the
construction of the dwelling;
(b) the use of defective
materials, products,
components or equipment
in the design, construction,
manufacture, repair,
alteration, remodeling, or
landscaping of the dwelling;
or
(c) the failure to adhere to
generally accepted
workmanship standards in
the community.
Indemnity clauses
against liability for
defective construction in
a contract between a
purchaser and a seller
are against the public
policy of the state and
are deemed void.
An HOA may file a
dwelling action against
a seller after it has
provided full disclosure
in writing to all of its
members and held a
meeting of its members
and board of directors,
and as long as it
satisfies the additional
pre-litigation
requirements. The
association's board of
directors must also
authorize the filing of
the action.
8
Arizona's construction defect laws
were substantially revised in 2015
to define a construction defect,
prevent a purchaser or seller from
recovering attorney and expert
fees in a construction defect
lawsuit, and to further establish
the seller's right to repair defects
before a homeowner can file a
lawsuit.
6
Ariz. Rev. Stat. § 12-1361, et seq.
7
Ariz. Rev. Stat. § 12-552.
8
Ariz. Rev. Stat. § 33-2002.
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Table 4
Summary of State Laws Addressing Residential Construction Defects (Cont.)
State Statute of Repose
Pre-litigation
Requirements Opportunity to Remedy Limitation on Damages
Definition of
"Construction
Defect"
Additional
Statutory
Provisions Notes/Relevant Info
California
9
Action may be brought for
up to ten years, depending
upon the specific
component or function of
the home that the plaintiff
is bringing action on
against the builder, and
when the suit is filed.
Homeowner must notify builder
that building standards have been
violated and that a claim is being
filed. Builder has 14 days to
acknowledge the claim. After
acknowledgment, builder can
perform an inspection within 14
days. If a second inspection is
deemed necessary, builder must
request this within 3 days of initial
inspection, and then complete
second inspection within 40 days.
Builder can make a cash offer or
an offer to repair the violation
within 30 days of initial or second
inspection. Homeowner has the
right to request up to three
additional contractors that could
do the work. Builder must also
provide an offer to mediate the
dispute, if the homeowner so
desires.
Limited to the reasonable value and
cost of repairs, relocation and
storage costs, lost business income
if home was principal place of
business, and investigation costs for
each violation.
None, but clearly defined
"building standards" are
provided that must be met.
HOAs are treated as a
"purchaser" under this
law.
Certain conditions can
lead to the builder being
excused from any
obligation or liability,
such as an "unforseen
act of nature," or a
homeowner not
following the builder's or
manufacturer's
recommendations.
Colorado
10
Six years, with a two-year
extension if defect is
discovered in fifth or sixth
year after substantial
completion.
11
The action must be
commenced within two
years after a defect is
discovered.
12
"Notice of claim" process,
whereby the residential
homeowner must notify the
construction professional at least
75 days before filing an action.
The homeowner must allow the
construction professional the
opportunity to conduct an
inspection of alleged defects,
which is to be completed within 30
days of notice.
If a builder wishes to remedy, the
builder must deliver an offer of
payment to cover defects or
agree to remedy, within 30 days
of inspection.
A claimant may not recover more
than actual damages, unless there is
a violation of the Colorado
Consumer Protection Act, or if the
construction professional does not
substantially comply with the Notice
of Claim process. A claimant may
then receive treble damages.
Damages are limited to $250,000 in
any action against a construction
professional.
None. An HOA may file a
defect action for five or
more units that are part
of the association, and
must notify unit
occupants of the action.
See legislative history section in
memo above.
9
Cal. Civil Code § Division 2, Pt. 2, Title 7.
10
Section 13-20-801, et seq., C.R.S.
11
Section 13-80-104, C.R.S.
12
Section 13-80-102, C.R.S.
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Table 4 (Cont.)
Summary of State Laws Addressing Residential Construction Defects
State Statute of Repose
Pre-litigation
Requirements Opportunity to Remedy Limitation on Damages
Definition of
"Construction
Defect"
Additional
Statutory
Provisions Notes/Relevant Info
Nevada
13
Action must be brought
within six years from date
of substantial completion.
This can be tolled from the
time notice of the claim is
given, up to one year.
Claimant must provide contractor
with a notice of defect before filing
an action, which states in specific
detail the nature and location of
defects within the residence.
Claimants must allow contractors
to inspect alleged defects. The
claimant must be present during
the contractor's inspection and
must identify the exact location of
each alleged construction defect.
Claimant must allow the
contractor a reasonable
opportunity to repair the
construction defect or cause the
defect to be repaired if the
contractor makes an election to
repair within 90 days of the
construction defect notice.
These repairs must be
completed within 105 days. If
the repairs are for a notice
received from five or more
owners or from an HOA, they
must be completed within 150
days.
If the contractor has elected not
to repair the constructional
defect, the claimant may bring a
cause of action for the
construction defect.
If a contractor does not elect to
repair or have a construction defect
repaired, a claimant can recover the
reasonable cost of repair, loss of
use, interest, and expert costs. This
is limited to construction defects
actually proven by the claimant, not
merely alleged. Attorney fees are
not recoverable damages.
A defect in the design,
construction, manufacture,
repair or landscaping of a
new residence,
of an alteration of or
addition to an existing
residence, or of an
appurtenance and includes,
without limitation, the
design,
construction, manufacture,
repair, or landscaping of a
new residence, of an
alteration of or addition to
an existing residence, or of
an
appurtenance:
• which presents an
unreasonable risk of injury
to a person or property; or
• which is not completed in
a good and workmanlike
manner and proximately
causes physical damage
to the residence, an
appurtenance or the real
property to which the
residence or
appurtenance is affixed.
If construction defects
create an imminent
threat to the health or
safety of the property's
inhabitants, then the
responsible party must
cure the defect in a
reasonable time. If the
repair is not cured in a
reasonable time, the
owner may have the
defect independently
fixed and can recover
costs for the repairs
from the responsible
party.
An HOA may only bring
a claim on the common
elements of a building.
The Center for Business and
Economic Research at the
University of Nevada, Las Vegas,
produced a study in 2013 entitled
"The Nevada Housing Market:
Prospects for Recovery." The
publication identifies how
protections intended for
homeowners that were built into
Chapter 40 of the Nevada
Revised Statutes by Senate Bill
241 in 2003 had the adverse
effect of dramatically increasing
the number of lawsuits brought
against contractors by too loosely
defining the term "construction
defect."
Nevada's construction defect laws
were substantially revised in 2015
to limit what constitutes a
construction defect, shorten the
statute of repose, eliminate
recovery of attorney fees in
lawsuits, change pre-litigation
notice procedures and the claims
a homeowner may bring suit
against, limit indemnity, and
restrict an HOA to bringing a claim
on only the common elements of
a building.
13
Nev. Rev. Stat. § 40.615, et seq.
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Table 4 (Cont.)
Summary of State Laws Addressing Residential Construction Defects
State Statute of Repose
Pre-litigation
Requirements Opportunity to Remedy Limitation on Damages
Definition of
"Construction
Defect"
Additional
Statutory
Provisions Notes/Relevant Info
Texas
14
Ten years after substantial
completion of
improvement. If a claim is
brought during the tenth
year, the period is
extended for two years
from the date of the
claim.
15
Claimants must give notice 60
days prior to filing an action. They
must provide, at the request of the
contractor, any evidence that
shows alleged defects and the
extent of the repairs needed.
Claimants must provide the
contractor with an opportunity to
inspect in the first 35 days
following notice of receipt.
If a claimant files suit seeking
damages in excess of $7,500, the
claimant or contractor may file a
motion to compel mediation of the
dispute. The motion must be filed
not later than the 90 days after the
suit is filed.
Contractors can make a written
offer to repair or have defects
repaired by a third party. If
claimant rejects the offer, he or
she must outline why in
reasonable detail, after which the
contractor has the chance to
make a counter-offer.
Should a claimant reject a
reasonable offer from the contractor,
or not allow the contractor a
reasonable opportunity to inspect or
repair the alleged defect pursuant to
an accepted offer of settlement,
there are limitations on the amount
that a claimant may recover. These
limitations are based upon the fair
market value of the contractor's last
offer of settlement, or, if the
contractor made an offer to purchase
the residence from the claimant, the
amount that was offered for this
purchase.
There are limits on the amount that a
claimant may recover, based upon
the economic damages caused by a
construction defect, such as: the
reasonable cost of repairs;
replacement or repair of any
damaged goods in the residence;
engineering and consulting fees;
cost of temporary housing during
repairs; reduction in current market
value after the construction defect is
repaired if the construction defect is
a structural failure; and attorney's
fees.
If a contractor does not repair
defects as part of an accepted offer,
there are no limitations on
recoverable economic damages.
A matter concerning the
design, construction, or
repair of a new residence,
of an alteration of or repair
or addition to an existing
residence, or of an
appurtenance to a
residence, on which a
person has a complaint
against a contractor. The
term may include any
physical damage to the
residence, any
appurtenance, or the real
property on which the
residence and
appurtenance are affixed
proximately caused by a
construction defect.
An HOA has the power
to bring a claim on
behalf of itself or two or
more unit owners.
16
In 2003, the state enacted
legislation creating the Texas
Residential Construction
Commission Act (TRCCA), which
governed residential construction
defect claims for single family
homes. The TRCCA created the
Texas Residential Construction
Commission (TRCC) and the
State Sponsored Inspection and
Dispute Resolution Process,
which were designed to oversee
construction of single family
residential properties, review
construction defects, and offer a
neutral analysis of construction
defect claims.
The TRCC went under sunset
review in the 2009 legislative
session, and was not renewed. It
became a defunct state agency in
2010.
Source: Legislative Council Staff.
14
Tex. Prop. Code Ann. § 27.001-004.
15
Tex. Civ. Prac & Rem. Code § 16.009.
16
Tex. Prop. Code Ann. § 82.102(a)(4).
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